Are you thinking about buying or selling a business? Are you unsure of what VAT implications there are, if any, or how much VAT you will have to pay HMRC in the process of buying or selling a business?

If so, this 5-minute read will help you to understand how to approach this transaction from a VAT point of view, and to ensure the process is managed as efficiently as possible to minimise VAT cashflow or losses.

What is a Transfer of Going concern (TOGC)?

When the assets of a VAT registered business are to be partly or wholly sold or transferred, consideration must be given as to whether the transfer qualifies as being a TOGC or not. Although the TOGC rules detailed are mandatory, there can also be value for both the seller/transferor and the buyer/transferee in any transfer qualifying as a TOGC for VAT purposes. If the transaction does qualify as a TOGC it can crystalise a significant VAT saving, and cash-flow benefit for the buyer. These rules only apply to the sale or transfer or assets in a business. If shares in the business are being sold or transferred, different VAT considerations will apply.

TOGC is a mechanism in VAT that allows for the sale or transfer of the assets of a business to be treated as outside the scope of VAT on the basis that it is neither a supply of goods nor services. If, on the other hand, the TOGC rules do not apply, the transfer is taxable and subject to VAT. In this case, the buyer will have to pay VAT to the vendor in addition to the purchase price on acquisition and then subsequently consider whether it can recover this VAT from HMRC on its next VAT return. These transfers normally involve significant sums of money and by structuring it ensure they meet the TOGC conditions, a significant cash-flow benefit is created for the buyer, as large amounts of VAT do not need to be paid to later be recovered from HMRC.

TOGC treatment is particularly beneficial for sales of land and property. When these sales are completed under the TOGC mechanism, in addition to the cashflow benefit, the buyer will also benefit from a saving in Stamp Duty. The saving arises on the basis that Stamp Duty is due on the total property purchase price, including VAT. So, where the property is sold under a TOGC and no VAT is chargeable, a Stamp Duty saving is instantly made.

The key questions to ask when considering whether TOGC treatment is applicable.

For a transfer of assets to qualify as being a TOGC there are specific conditions that must all be met, and these are the key questions that you should be considering regarding the conditions:

• Does the purchaser intend to use the assets to carry on the same kind of business as the seller? For example, if the transferor is a property rental business, will the buyer continue to rent the property following the transfer, or will it be used for carrying out a different business activity? If it is the latter then the transfer can no longer be classified as a TOGC, and the transaction will become subject to VAT, whereas if it is the former then this condition will be met.
• I, the seller am a taxable person and am VAT registered, is the purchaser also a taxable person/do they become a taxable person because of the transfer? If so, do we have proof of the buyers VAT registered status or proof that they have applied to HMRC to become VAT registered? On a related note, if a property that is opted to tax is sold as part of the TOGC, the buyer must also be able to demonstrate that they have made an option to tax over the property on or before the completion date, for a TOGC to apply; so has the buyer provided sufficient proof of an option to tax being notified to HMRC? The timing of such notifications is key to meet the conditions to qualify as a TOGC.
• If you are only selling a part of a business, after it is sold is it capable of separate operation? For example, if a single branch of a retail business is sold, can it continue to trade once transferred? Again, even if this is the case, the buyer would be obligated to continue this similar trade, or risk losing the TOGC status of the transaction.
• Is this transfer a part of a series of consecutive transactions? There must not be a series of immediately consecutive transfers taking place for a TOGC to apply. This essentially means in practice that the buyer must use the acquired assets to operate the same kind of business before transferring them to a third party. There are no specific rules mandating how long the business must be operated before transfer for the TOGC conditions to be met. In practice, it seems sensible for one VAT period (e.g. a month or a quarter) to be used as a guideline but each case needs to be considered individually.

Navigating the potential pitfalls of a TOGC

The questions listed above are very important to ask as, in addition to the cashflow benefits outlined, if TOGC treatment is incorrectly applied to a transfer, the transferor can become liable to penalties and interest charged by HMRC, in addition to the VAT that will be due to be paid on the transfer. As a result, we recommend that a clause is included in any contractual agreements that indemnifies the transferor from any failures on the transferee’s side to meet the conditions of a TOGC. Further, if a TOGC is incorrectly treated as a taxable transaction, the buyer is not entitled to recover the VAT charged by the seller as its input tax and may therefore be subject to enquiries from HMRC.

If you are considering selling or purchasing a business, either as a transfer of assets or the sale of shares, our team are on hand to advise on the VAT liability issues that can arise.

Please contact a member of the team to find out how we can help you.